Provisioning norms to hit profitability of NBFCs

The proposed asset classification norms and standard asset provisioning norms of the Reserve Bank of India are expected to impact the profitability of the non-banking financial companies (NBFCs).

Shriram Transport Finance Company (STFC) Managing Director and CEO Umesh Revankar said, “Our customers are primarily those who don’t get finance from banks. Therefore bringing them at par with bank customers, is not very good for us.” The central bank has suggested asset classification norms for non-performing assets to come down to 120 days from April 1, 2014 and to 90 days from financial year 2015-16. At present, NBFCs can classify loans as bad assets after 180 days.

Ramesh Iyer, managing director and CEO of Mahindra Finance, which is mainly into tractor financing, said asset classification norms should be applied in line with the asset class and geographies, as the behavioural pattern differs across product segments and regions.

He added that higher provisioning norms will impact profitability, and the 90-day NPA recognition norm would bring further pressure on capital.

RBI proposed to raise the requirement of tier-I capital to 10 per cent from the existing 7.5 per cent.

Some players, however, said the proposed changes will benefit the sector in the long run.

V Lakshmi Narasimhan, chief financial officer, Magma Fincorp, said, “Bringing the NPA recognition norms at par with banks is a good step. If the underwriting is done prudently, then there shouldn’t be a problem. If a customer is not able to pay for three months, then he is also not expected to pay in six months.” Regarding capital adequacy he said almost all top NBFCs have tier-I capital of above 11 per cent so the new norms aren’t a problem.

Income tax benefit should also be brought at par with the banks if RBI is bringing NBFCs at par with banks, he said. Banks get tax benefits on their entire provisioning but we get that benefit only on written-off books, he added.

Rating agency CRISIL said the tightening in NPA recognition norms and increase in standard provisioning requirement to 0.40 per cent from 0.25 per cent will adversely affect the profitability of the NBFC sector and the Return on Assets (RoA) is expected to drop by 25 basis points in the medium term. Pawan Agarwal, senior director, CRISIL said “the reported gross NPAs will increase in the near-term due to re-classification, the enhanced focus of NBFCs on collections in the initial buckets will lead to an improvement in asset quality gradually in the medium-term.”

The NBFC sector would need to raise about Rs 8,000 crore to to maintain the current cushion over regulatory minimum, under the revised norms, rating agency added.

RBI yesterday released the draft guidelines for NBFCs based on committee chaired by former deputy governor of RBI Usha Thorat. The draft guidelines are open for suggestion and feedback till January 10, RBI said in a statement.